Welfare Reform and Work Bill Committee

Written evidence submitted by Your Housing Group, Devonshires Business Advisory Services (DBAS) (WRW 80)

Your Housing Group

1. Your Housing Group (YHG) is a Registered Provider of social housing and supported housing based at Warrington. Your Housing Group was formed on 2nd April 2012 following the merger of Harvest Housing Group and Arena Housing Group.

2. This merger has created a new Group with a combined stock of around 34,000 properties across the North-West, Yorkshire and the Midlands and has a projected annual turnover of approximately £150 million per year.

3. YHG through its subsidiaries is a sub-contractor and investor in five Housing PFI schemes, of which three are HRA schemes and two are non-HRA schemes. The proposed rental reduction has the potential to impact on the viability of all the Housing PFI schemes in terms of the contractual obligations for payments under the long-term agreements for the funding of the projects over 25 years.

The proposed exemption for PFI’s from the social housing rent reduction within the Draft Bill

4. This submission is to address the issue in relation to rental income on the PFI schemes for extra care housing through Non-HRA PFI, relating to clauses 19 to 22 of the draft Bill.

5. We note from all previous documentation on rent policy, and within the draft Bill, there may be exemptions for arrangements that have existing funding arrangements that cannot be changed such as PFI. We would propose that there is a specific exemption in relation to social housing provided within non-HRA Housing PFI schemes.

6. A DWP Brief on 28th September 2015 supports the possibility of this exemption:

" Exceptions and exemptions to the policy change

There will be a number of exceptions from the rent reduction requirements including low cost home ownership and shared ownership, and where there is a mortgagee in possession or the successors in title. This mirrors the current policy and is designed to prevent adverse impact on the valuation of existing social housing stock for security purposes.

Further exceptions will be set out in regulations. This may include the types of accommodation and tenants that are currently exempted from the Rent Standard will continue to be exempted – these include specialist supported housing, temporary social housing, PFI accommodation, student accommodation, Intermediate Rent accommodation, care homes and nursing homes.

The Regulator of Social Housing will have the power to grant a full or partial exemption to a private registered provider, where it considers that complying would jeopardise the financial viability of that provider and with agreement from DCLG Secretary of State. Statutory guidance will set out the circumstances in which a waiver will be considered."

The reason for the proposed exemption

7. The funding obligations within the contractual arrangements of the non-HRA PFI support an exemption. In the context of non-HRA housing PFI schemes the rent collected is a ‘third party’ income to the financial model collected and retained by the Registered Provider (RP) under a sub-contract to the Special Purpose Vehicle (SPV) that contracts with the Council. The Registered Provider makes a fixed payment up to the SPV on a monthly basis in consideration of the assets – the Construction Services Agreement (CSA) Payment. This payment is the agreed structure for all non-HRA PFI’s and is tax efficient. The starting CSA Payment is set during development of the model as ratio to starting rent, but from thereon in is a fixed payment made from the RP to the SPV regardless of the level of rent collected and is indexed at CPI + 1% for the Contract Period.

8. During negotiations on the PFIs, the rental policy change was traditionally a Council retained risk. However, there was a push from the HCA PFI team for the later Housing PFI schemes for the Contractor to take the specific change in law risks in relation to rent policy change. In either case without an exemption additional funds would be need for the shortfall from the RP or the Council to keep the funding solution and the SPV whole. The private sector SPV and its investors’ returns would not be impacted by any reduction in rental income at the RP level.

9. YHG had undertaken sensitivities in relation to taking the rent risk, and undertook rigorous testing of scenarios. However, the decision and sensitivities were based on the government’s agreement for the 10 years of CPI +1% to be applied to social housing that at the time was intended to give stability to the sector. It is therefore reasonable that YHG could not have foreseen within that sensitivity testing the potential within that period for a rent reduction for the first four years that would impact upon the entire income stream for the full 25 year contract period.

10. Should the rent reduction of 1% per annum be applied to the extra care housing within the two non-HRA PFI schemes within YHG, the RP would be facing a potential of up to £20m shortfall between the rental income received and the payments due to be made to the SPV through the Construction Services Agreement Payment over the life of the two contracts. This would materially exceed any prudent risk allowed for within the sub-contract arrangements, and therefore would put the RP in a difficult position funding the PFI from Social Housing income as regards the Regulatory Framework. It places the RP in an invidious position of either breaching it contractual commitment under the PFI or breaching certain provisions of the Regulatory Framework that applies to RPs.

11. Further, part of the project is funded by a bullet payment identified as a Residual Value only repaid at the end of the Contract Period. This made the project more affordable for the Council procurers. However, there is a risk that there may be consequences on the valuations required each year by the funders in relation to the PFI assets cover ratio for the residual value sum as this is a value based on an EU-VSH calculation. EU-VSH is impacted by future rental cashflows. As such the RP is at risk of the potential need to pledge non-PFI properties as security as a result of this rent policy reduction applying. In turn, this would also put the RP in a difficult position regarding the Regulatory Framework as is directly contrary to the objectives of the Regulatory Framework to protect social housing assets.

12. In the context of the briefing note from DWP it notes the need to consider an exemption where there is a mortgagee in possession. Whilst the mortgagee is not in possession, there are mortgagee in possession clauses as a standard requirement by the funders within the funding arrangements on all the non-HRA PFI’s. Therefore this should be noted in relation to the need for an exemption for all non-HRA Housing PFI accommodation.

Summary

13. Historically there have been exemptions for PFI schemes in relation to rental policy application, as well as for supported housing schemes for the elderly. We believe that a specific exemption under the Bill should be provided for non-HRA housing PFI schemes on the grounds of the existence of a Mortgagee in possession clause for the funding agreements and the contractual funding obligations that make the rent reduction application not financially nor regulatory viable.

October 2015

Prepared 20th October 2015